The Inconvenienced Economist

Thursday, 10 October 2013 16:50

In a blog post at Econbrowser, Princeton Economist Angus Deaton complains about how his work on the impact of inequality on health outcomes was challenged by Michael Ash, an economics professor at the University of Massachusetts. He compares this challenge to the more recent challenge posed by Ash, along with Thomas Herndon and Robert Pollin to the work of Harvard professors Carmen Reinhart and Ken Rogoff. People may recall in this latter work, Herndon, Ash, and Pollin showed that the results in Reinhart and Rogoff's original 2010 paper on the relationship between national debt and growth were due to both an Excel spreadsheet error and a peculiar method of aggregation.

Deaton joins the criticisms of the two papers:

"In our case, as in Reinhart and Rogoff, neither the coding error (in our case there was none) nor the choice of weights has any effect on the main results. ... With Reinhart and Rogoff, they referred only to an early paper, ignoring updated results. But the effect is the same, to magnify a tiny or non-existent problem and claim that it threatens the whole enterprise whereas, in fact, nothing of the sort is true."

Deaton then complained that the criticisms of Reinhart and Rogoff did not even take place in refereed journals, but rather through blog posts (yes, I'm one of those guilty) and the media.

Perhaps Deaton is unaware of the impact of Reinhart and Rogoff's work on the debate over stimulus and deficits. Otherwise it is difficult to see how he can trivialize the importance of the criticisms from Herndon, Ash, and Pollin (HAP) to the public debate on this issue.

Contrary to what Deaton implies, Reinhart and Rogoff highlighted the idea of a cliff at a debt to GDP ratio of 90 percent from their first paper. Above this level, their earlier work showed a sharp falloff in growth. This paper had enormous impact on policy debates in Europe and the United States. In fact, it was the explicit basis for the debt targets set out by Erskine Bowles and Alan Simpson, the co-chairs of President Obama's deficit commission.

While Reinhart and Rogoff's later work did not provide evidence of such a cliff, this conclusion from their original paper continued to guide public debate uncorrected by Reinhart and Rogoff. The spreadsheet error uncovered by HAP managed to bring this issue into the public spotlight. When the error was corrected, any basis for claiming a large growth penalty for debt to GDP ratios in excess of 90 percent disappeared. There was in general a negative correlation between growth and debt levels, but the sharpest tradeoffs were at relatively low levels of debt (under 30 percent of GDP), not the 90 plus level highlighted by Reinhart and Rogoff.

HAP also inspired a series of papers that examined the direction of causality. All of these papers showed evidence that the causation overwhelmingly went from slow growth to debt rather than in the other direction. In other words, countries that were growing slowly tended to accumulate lots of debt, rather than the other way around.

The result is that policymakers and the general public now have a much clearer view of the potential limits posed by debt. The fact that this exchange of analysis among economists occurred outside of professional journals would seem to be a criticism of professional journals and their limited relevance for policy debates. If a side effect was that two prominent Harvard economists were publicly embarrassed, that seems a small price to pay.

Addendum:

Reinhart and Rogoff might have saved themselves and the rest of the world much grief if they had made their data publicly available in January of 2010 when their work first began to have a major impact on policy debates.

And when you thought the issue was dead and buried by analysis since April. It's back. Yet again.

Conveniently forgotten is 'The Law of Finance' arising from that R-R paper, a law decreed by the peerless Niall Ferguson. But still evident are rates of unemployment in excess of 20% in many European countries from policy arising from that paper.

+2

...written by JDM,
October 11, 2013 4:23

Sounds like Deaton is upset that the facts about this shoddy work were placed in front of the public, instead of being hidden from view. And to call the R&R "errors" tiny is ludicrous. In fact I object to them constantly being referred to as errors or spreadsheet mistakes; it's obvious they deliberately excluded data that didn't fit their desired outcome.

+1

This sounds very much like Romney's quiet rooms argument ...written by BruceMcF,
October 11, 2013 8:57

... academic work that has an influence on important public policy should only be criticized in quiet rooms ... say, in the conference meeting rooms of the regional associations, and not at the national meetings, never mind in front of the great unwashed.

+1

Its completely illogical that a T-bond limit of 90% would slowwritten by Auburn Parks,
October 11, 2013 9:23

growth with our monetary system. There is no finite pool of loanable funds in our floating exchange fiat system. T-bonds serve to manage the interest rate, not fund the Govt. T-bonds are the financial savings of the Non-Govt, they are Net financial assets. Seen through the lens of operational reality, how could economic growth possibly be hurt because the Non-Govt has financial wealth equal to the total yearly output of the entire nation? The two aren't even related. And before anyone points out the obvious about interest costs, the Fed sets the interest rate, not the market. The Fed could keep the interest rate at zero forever and we'd never have any problems. Higher capital requirements and tougher lending standards are the way to control private debt booms, not interest rates.

+0

The debate didn't occur in written by gvryzin,
October 11, 2013 9:29

For Deaton to complain that the debate didn't take place in referred journals is truly strange and bizarre. The original paper by R&R was pub­lished in the Papers and Pro­ceed­ings issue of the Amer­i­can Eco­nomic Review. This was an issue of the jour­nal whose papers do not go through the usual peer review process.

So according to Deaton you get to publish your claims without peer review, but any criticism must occur through that process? Huh? Earth to Bizarro World!

+3

Deaton's blogpost and sharing data written by John Wright,
October 11, 2013 10:08

Deaton closes with "Scholars will also be much less willing to share data than is currently the case; doing so allows anyone who is unscrupulous enough to turn your cooperation against you."

Perhaps if a researcher's data is capable of damaging the researcher's (academic) reputation, there may be something wrong with the either the data, the researcher's conclusion or the researcher's methodology?

As Dean Baker points out, If R&R had shared their data earlier they may not have suffered nearly the damage to their reputations as their spreadsheet error might have been caught earlier.

Deaton seems to be suggesting publishing economic research conclusions without granting access to the underlying data to other researchers for verification.

Is this a good message for a 67 year old experienced academic to be giving younger academics?

And how often in academia does one experience, as Deaton relates, "anyone who is unscrupulous enough to turn your cooperation against you."?

Is this a significant issue and one that should chill data sharing?

+1

...written by JSeydl,
October 11, 2013 10:51

There was in general a negative correlation between growth and debt levels

Well, duh. Think about how debt levels are measured: as a percentage of GDP. Of course there is going to be negative correlation; GDP is contained in both series. This means that if GDP fell for some arbitrary reason, say an oil shock, this will necessarily raise debt levels, in the same way that reducing the denominator of any fraction raises the value of the friction. I have no idea why this simple point was never mentioned in the debate ... because it really makes R-R's counterclaim that there is still negative correlation look super silly.

+1

...written by AlanInAZ,
October 11, 2013 11:04

While Reinhart and Rogoff's later work did not provide evidence of such a cliff, this conclusion from their original paper continued to guide public debate uncorrected by Reinhart and Rogoff